Development Finance Guide

Are you seeing any new constraints for residential finance where there is an intention to hold onto the properties for growth/cashflow?

What residential finance LVRs are still achievable for 3 and 4-unit developments?

 

No constraints on resi construction per se. The big changes have been the one line valuations - traditionally these had an approx 25% shading but this is now much more.

What I'm trying to say is that developers are going to find it hard to fund developments and I think even the mum and dad investors doing the smaller developments.

Great opportunity for cashed up buyers to negotiate on development sites in the next 6 months and there should be a greater number of sites on the market.

 

Ta. Will assume 30% 'shading' in my numbers :-/

 

Hey Shahin, this is brilliant stuff!
I would ask though, if developers are unable to get funding and as a result their development land stock starts to hit the market at reduced cost. Why and how would others benefit from this?
Assuming if a cashed up developer with experience cannot get it done then what would a mere mortal do with it?
Secondly if these are commercial dev sites then it's not really likely you can go and do a two townhouse development on a main rd.

 

There are still lots of buyers out there (well in Sydney anyway) and a lot of these buyers are actually owner occupiers so the demand is there for the end product.

Funding constraints for developers could (I'm only predicting what will happen in the future based on funding issues today) mean less competition for sites, cheaper sites on the market and so on and this in turn would mean lower cost prices and higher margins for developers with cash ready to go.

As to the development - there are lots syndicates coming together as they can see some of these opportunities.

A cashed up developer is mostly likely a highly sophisticated individual and there are many ways they can make money. They last thing they want to worry about is funding, increased pressures in presales requirements, bonds which the lenders retain for up to 12 months post construction, etc.

 

Thanks @Shahin_Afarin for the guide.

can you break it down even further for the most green of us ?

If you wanted to building a new house or duplex as an investment property would you get one loan for the land and one for the house ?

Assuming yes. What type of deposit would you used for the land. I find 12% deposits for established residential dwellings are the norm but I am not sure about raw land.

For the construction loan what type of desposit would you need ? Will the construction loan only be used to pay the builder or can you use the loan for other purposes such as architect fees, council fees, interest etc ?

Thanks Logan

 

Greay post Shahin and appreciate the updates.

BOQ are currently doing "end values" for 3 unit developments via resi channel, which can mean the difference between a deal and no deal!

 

Hi Colin thats great news - did you place an application with them or did someone mention this to you? I spoke to their credit team and they said that like most of the other lender they will take the lower of the valuation or land plus construction?

 

@Shahin_Afarin it was via the BDM and here is a copy of the email;

Have high lighted the reference to use of "end values" in RED

Property Construction / Development:

Unit Developments

· Construct / develop maximum of 3 units on a single title or single site.

 Not for speculative purposes.

 Servicing based on rental of the units financed and other income sources (not sale of units).

 Not available to Builders or Owner Builders.

 Full valuation based on “on completion” value.

 Arm’s length fixed price building contract and full costing breakdown to be provided

 

Its one loan for the house or land and then a second loan for the construction.

Re deposit this is going to depend on the lender and the number of dwellings you are constructing however several lenders will do up to 2 on vacant land @ 95% including LMI capped. Construction would also be up to 95% but I would be concerned going to 95% LVR as (a) the LMI premium would be high and (b) you should have satisfactory funds for things going wrong, unexpected costs and upgrades if you decide you want to do them.

There are also going to be soft costs that can be factored into the loan - there are heaps to mention but an example is council bonds, utilities, etc.

 

Are there any residential lenders doing these more generous LVRs for 3 and 4 unit residential scenarios where an existing house will be demolished?

 

Yes, there are options available at higher LVRs.

 

Total lend would be in the $800k to $1M range ( 3 or 4 x 2 bedders). $270k of that is refinancing the site ( existing house ). Aim would be to predominantly service that from the rent income from the resulting development (I assumed 80% of rent ).

I have no idea if that sort of lend is realistic @ 85% or 90% LVR.

 

Sub 1 mill lending can be done at 90% with reputable lenders.

 

Thanks! Will run numbers on an 85% scenario (instead of 80% I have been using). Meeting with my broker in the April/May timeframe.

 

Which lender will entertain up to a 4 unit development with pre-sales at 80% of contract? That is, 80% of end value - with end value being based on sale contracts.

a) Capitalising interest is a non issue.
b) Interest rate is a non issue (up to 5.5%)
c) If at 80% the developer does not need to use cash, is this an issue?

Thanks!

 

You are not going to be able to get end values under residential lending. You will need to do it under commercial lending. If you have presales then you shouldn't have issues.

What issues exactly have you encountered?

 

What are you putting into the deal?

The banks will want you to have some skin in the game. Unlikely any of them will fund 100% of the costs regardless of end value/pre sales.

Blacky

 

I have found if you put 20% in on the land, and then get permits and uplift, they will fund the rest if it stacks up.

 

True.
However, thats not how I read his/her post. Looked to me more that he wanted to fund 100% of costs based on end values and pre-sales sufficent to clear the debt.

Maybe I miss-read the intent/proposed arrangments.

Blacky